Fintech in banking
8th September 2017
Whether it’s an app, a platform or a payment processing system, financial technology (fintech) is changing the way we spend, save and manage our finances.
Fintech in banking is being used in two ways:
- To improve the systems and processes that existing financial services providers use.
- To ‘disrupt’: to create challenging alternatives to traditional providers that cut out the middle man.
Blockchain in payments
Improving existing systems and processes means things like faster payments between bank accounts and new payment methods, such as Apple Pay and Pingit.
What is a blockchain?
A blockchain is essentially a way to organise transaction data to make it faster and more secure. A blockchain is like a never ending, automated and immediate digital bank ledger, dropping information into individual, linked ‘blocks’. Bitcoin, the cryptocurrency, was built using blockchains.
What is a bank API?
API stands for ‘application programming interface’. Bank APIs govern how banks store customer and transaction data. Banks are under pressure to ‘open up’ their APIs to boost innovation and competition in the banking sector. This would mean that other new providers could, with your consent, gain access to your banking data to offer you new financial services tailored to the way you save, spend, earn and budget.
The fintech industry includes ‘emergent’ disruptors - companies that disrupt the existing market using innovative technology.
Such disruptive fintech start-ups have low overheads and can build hi-tech systems that aim to deliver a better service at lower cost. These could be online platforms or mobile phone apps.
Peer-to-peer (P2P) lending is a high-growth area of UK fintech, with platforms including Zopa, RateSetter and Funding Circle. The first two enable savers to ‘lend’ to other individuals via the platform, while Funding Circle enables people to lend to businesses. P2P lending can also be known as debt-based crowdfunding. Read more about crowdfunding here.
The platforms aim to minimise risks by credit checking borrowers, but because they don’t have the same overheads as banks, the interest rates available via P2P platforms tend to be higher than those from high street banks. The persistence of historically low interest rates has contributed to the growth of the P2P industry and inspired lots of platforms to enter the market.
If you use these platforms, bear in mind that FSCS doesn’t protect them. We can only potentially protect P2P investors if the investment goes wrong after they were given bad advice to invest in P2P, not if the investment goes wrong after they made their own decision to invest.
Fintech has spread to other areas. ‘Robo-advisers’ are now also taking over the online investment world. Nutmeg, Money on Toast and Moneyfarm are among the platforms that gather basic information about investors and then design investment portfolios for them.
The tech is the ‘robot’ receiving the information then turning it into portfolios. The recommendations are less specific than you would get from an independent financial adviser but the aim is to be cheaper and more transparent. As robo-advice develops, new platforms are targeting niches, such as ethical robo-advice.
Money management apps
Managing money has not yet translated well into easy-to-use apps for your phone. This is partly because providers other than banks have not been able to access meaningful data on customers’ saving and spending that they could turn into a useful tool. If banks open up their APIs, this could change. Moneyfarm, Monese and Curve are among the providers offering apps as an integral part of their service, as well as Revolut and Monzo.
Transferring money abroad
Fintech can make overseas payments a lot cheaper, benefitting personal payments to family abroad and businesses making cross-border payments. TransferWise, Revolut and CurrencyFair are all digital platforms – also with apps – that make this easier and cheaper than it used to be.
Fintech’s potential is huge but the days of paying in cheques at your local bank branch are not numbered. Some providers are focusing on a digital audience but others, such as Metro Bank, Handelsbanken and Virgin Money, are expanding branch networks to focus on the gap for the personal touch that so far, fintech has not managed to fill.